Despite promises to the contrary, government is systematically making it illegal, or at least completely impractical, for anyone other than a big bank to enjoy getting decent interest rates on their money.
According to The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), beginning January 21, 2013, the rules governing seller carryback financing are changing and will severely restrict this form of lending.
Specifically, the DFA states that no creditor may make a mortgage loan without making a reasonable or good faith determination that the customer has the ability to repay the loan based on eight statutory criteria. Further, the DFA requires that residential mortgage loans, including seller carryback financing, must be offered and negotiated by licensed loan mortgage originators. The DFA definition of mortgage originator exempts an individual (or an estate or trust) that provides mortgage financing for no more than three properties in any 12-month period. Regardless of the exemption, however, the DFA requires that financing must meet the following criteria:
- The seller did not construct the home
- The loan is fully amortizing (balloon payments are prohibited)
- The seller determines that the buyer has a reasonable ability to repay the loan
- The loan must have a fixed interest rate for a minimum of five years
- The loan must meet other criteria set by the Federal Reserve Board
There is hope coming from several fronts. The National Association of Realtors will continue to seek to minimize the restrictions on seller financing. Also, a few days ago, a member of the U.S. House of Representatives proposed legislation that would amend a provision of DFA to allow certain loans that are not fully amortizing to be used in seller carry back financing.
What is so ironic to us is that these new government regulations were passed in the name of reigning in the big banks and protecting the individual. Instead, these laws make sure that only the largest banks are allowed to make decent returns.